CA Foundation · Accounting · Inventories
As per AS 2 (Valuation of Inventories), inventories are ordinarily valued at:
Under AS 2, inventories are valued at the lower of cost and net realisable value. This applies the prudence principle: anticipated losses from falling prices are recognised immediately, while unrealised gains are not anticipated, so closing stock is never shown above what it can recover.
- ACost or net realisable value, whichever is higher
- BCost or net realisable value, whichever is lowerCorrect
- CReplacement cost or selling price, whichever is lower
- DSelling price less only the profit margin of the firm
Explanation
AS 2 requires inventories to be valued at the lower of cost and net realisable value. This follows prudence, so that expected losses are recognised but unrealised gains are not. Choosing the higher of the two would overstate stock and profit.
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